Trigger Strategies

Definition

Trigger strategies are a type of strategy in game theory used in repeated games, where a player responds to the actions of others based on a predefined rule. Typically, these strategies involve cooperation until the other player defects or cheats, after which the player will revert to a punishment phase. This creates a strong incentive for players to maintain cooperation to avoid negative consequences.

5 Must Know Facts For Your Next Test

1. Trigger strategies are crucial for sustaining collusion because they deter firms from undercutting each other's prices by threatening punishment.
2. The most common trigger strategy is the 'grim trigger,' where a player cooperates until the other defects, after which they will defect forever.
3. Trigger strategies require that players have a long-term view, valuing future payoffs over immediate gains.
4. These strategies can be seen as a form of commitment device, as they help enforce cooperative behavior through the threat of retaliation.
5. The effectiveness of trigger strategies relies on the ability of players to monitor each other's actions and enforce the agreed-upon outcomes.

Review Questions

• How do trigger strategies promote cooperation in repeated games?
  • Trigger strategies encourage cooperation by establishing clear consequences for defection. When one player knows that defecting will lead to punishment in future rounds, they are more likely to cooperate. This creates a stable environment where players can trust one another, as they understand that their actions have long-term implications on future interactions.
• In what ways do trigger strategies relate to collusion among firms in an oligopoly?
  • In oligopoly settings, trigger strategies help maintain collusion by providing firms with a way to coordinate their actions without explicitly communicating. When firms agree to stick to high prices, a trigger strategy ensures that if one firm lowers its price, the others will retaliate by also lowering their prices indefinitely. This threat helps deter price cuts and encourages all firms to stay committed to maintaining higher prices.
• Evaluate the limitations of using trigger strategies in real-world scenarios involving collusion and competition.
  • While trigger strategies can effectively promote cooperation, they also face significant limitations in practice. Real-world markets are often characterized by uncertainty and incomplete information, making it difficult for firms to accurately monitor each other's actions. Additionally, if market conditions change or if there are external factors influencing pricing strategies, the rigid nature of trigger strategies may lead to suboptimal outcomes. Lastly, legal repercussions and anti-collusion regulations complicate firms' willingness to engage in such cooperative behavior.

Related terms

Nash Equilibrium: A situation in a game where no player can benefit by changing their strategy while the other players keep theirs unchanged.

Prisoner's Dilemma: A standard example of a game in which two individuals may not cooperate, even if it appears that it is in their best interest to do so.

Collusion: An agreement between firms in an industry to limit competition, often leading to higher prices and reduced output.